Obamaloans: The Bank of ACORN

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April 3, 2014 - 12:27 — William Christian

After the public humiliation of the Association of Community Organizations for Reform Now (ACORN) in late 2009 and its subsequent dissolution (at least at the national level) by early 2010, one might have thought that the national shakedown group was dead and buried. But like a decapitated hydra, another beastly head has already taken its place: the Community Development Financial Institutions (CDFI) Fund. Created in the Riegle Community Development and Regulatory Improvement Act of 1994, the CDFI Fund is alive and well.

Today, it is the primary vehicle that funds CDFIs, the government-backed competitors to private sector, short-term (also referred to as “payday”) lenders. The Obama Administration, through its “Operation Choke Point,” has attempted to starve short-term lenders of their access to financial institutions by discouraging banks from facilitating the automated clearing house (ACH) function of processing the cash. If successful, this could have the effect of driving the short-term lenders out of business. Since traditional banks are loathe to engage in this risky market, the administration knows that the consumers will be driven (by default) to the taxpayer-backed CDFIs. Unlike the private sector lenders that must rely on customer repayments in order to stay in business, the CDFIs are awarded taxpayer dollars in the form of grants that have no repayment requirement. These distributions are overseen by community organizers (akin to the ACORN crowd, not to mention President Obama’s own past career experience) that recognize the political benefit of doling out dollars (so-called “Obamaloans”) regardless of the ability to repay.

A step back, for a brief review of ACORN’s mindset, is timely. One of the many wrongs that ACORN sought to redress was the inaccessibility to capital by those at the lower rungs of the socioeconomic ladder. Banks often did not provide services in neighborhoods below a minimum income threshold. Critics decried this as “redlining,” taken from the practice of drawing a red line on maps around areas where the institutions would not invest.

During the post-Watergate, idealistic-reformer era, would-be do-gooders (particularly those elected representatives coming to Washington to harness the levers of government to redress perceived establishmentarian wrongs) tried to solve the red-lining issue through the Community Reinvestment Act of 1977 (CRA), which was signed into law by President Jimmy Carter on October 12, 1977. The CRA was in fact Title VIII of the more comprehensive law, the Housing and Community Development Act, but its effect on banking practices has been so pervasive that it is more often (incorrectly) remembered as a stand-alone bill. The CRA’s chief purpose was to encourage regulated banks to address the needs of borrowers in low- to moderate-income neighborhoods. More specifically, the law was intended to reduce discriminatory lending practices in red-lined neighborhoods. The legislation required banks to meet these needs “consistent with the safe and sound operation of such institutions.” (Section 802, P.L. 95-128)

Nonetheless, banks remain leery of higher-risk ventures, so government-backed CDFIs can provide credit and financial services to those previously identified underserved populations. Absent market support for these endeavors, federal appropriations were needed to underwrite CDFI activities. So, the CDFI Fund was established within the U.S. Department of the Treasury under the aforementioned Riegle Act (P.L. 103-325) in a major revamp of the CRA.

While the ACORN folks may have disbanded nationally, their community financing objectives are proceeding apace through the CDFI-administered Obamaloans. Another sop to Obama’s liberal, entitlement-beholden base? Perhaps. Another taxpayer bailout in the making? Yes, I would say that you can take that to the bank.